Finance in Pure Theory of International Trade: A New-Ricardian Heckscher-Ohlin-Samuelson Model

This paper builds up a Heckscher-Ohlin-Samuelson model of production and trade where capital is introduced outside the production process as a financial capital or credit as per the classical Ricardian wage fund framework. Stock of credit or financial capital as past savings, finances employment and machines or capital goods used in the process of production with Ricardian fixed coefficient technology. Availability of finance does not affect production or pattern of trade only nominal factor prices. International financial flows will not alter pattern of trade, but movement of labour and machines will. Such results change drastically when we consider a model with unemployment and finance dictates real outcomes much more than before. Introducing finance affects trade patterns with unemployment and especially with imperfect credit markets. Our results are consistent with contemporary empirical evidence and have policy implications for role of financial development and quality of institutions for innovation and economic development. Numerical illustration corroborates this.